Analyzing Investment Opportunities Requires Management Of Portfolio
The Relationship between Risk and Rate of Return
Risk and rate of return are directly related. It follows that as the level of risk of an investment increases, its potential return goes up as well. This relationship is illustrated in the pyramid of investment risk illustrates whereby as one moves up the pyramid, they are susceptible to higher potential returns but with a greater risk of loss of principal. Moreover, the risk-free rate of an investment denotes the interest an individual would realize from an absolutely risk-free investment over a specified time.
Therefore, the risk-free rate provides the minimum return a financier would get from any investment since they would not accept more risk unless the risk-free rate is less than the potential rate of return. The expected return…